Intuit Inc. — Form 10-Q Summary
Reporting period: Quarter ended April 30, 2014 (fiscal 2014 third quarter); year-to-date figures cover the nine months ended that date. Unaudited results are for continuing operations unless noted. Intuit provides financial and business management products and services, including QuickBooks, TurboTax, Quicken, Lacerte and ProSeries.
Financial performance
| Metric | Q3 FY2014 | Q3 FY2013 | Nine months FY2014 | Nine months FY2013 |
|---|---|---|---|---|
| Revenue | $2.388 billion | $2.091 billion | $3.792 billion | $3.537 billion |
| Operating income, continuing operations | $1.494 billion | $1.282 billion | $1.371 billion | $1.293 billion |
| Net income, continuing operations | $984 million | $858 million | $890 million | $869 million |
| Diluted EPS, continuing operations | $3.39 | $2.83 | $3.06 | $2.87 |
| Net cash from operating activities | Not provided for the quarter | Not provided for the quarter | $1.530 billion | $1.560 billion |
- Q3 revenue rose 14%, operating income 17%, continuing net income 15%, and continuing diluted EPS 20% year over year. Nine-month increases were 7%, 6%, 2%, and 7%, respectively.
- Calculated operating margin was approximately 62.6% in Q3 versus 61.3% a year earlier; nine-month margin was approximately 36.2% versus 36.6%.
- At April 30, cash and cash equivalents were $1.574 billion, investments were $1.059 billion, and cash, cash equivalents and investments totaled $2.633 billion. Working capital was $1.755 billion and the current ratio was 2.0:1.
- Long-term debt was $499 million carrying value, representing $500 million of 5.75% senior notes due March 2017. The $500 million revolving facility was undrawn; Intuit reported compliance with its covenants.
- Nine-month financing cash use was $1.377 billion, including $1.425 billion of share repurchases and $165 million of dividends. Operating cash flow declined $30 million year over year. Cash increased $565 million, supported in part by proceeds from the IFS sale.
- Declared dividends were $0.19 per share in Q3 and $0.57 per share for the nine months. The board authorized up to a further $2.0 billion of repurchases through August 19, 2017.
Segments and material changes
- Small Business: Q3 revenue was $569 million, up 8%; nine-month revenue was $1.649 billion, up 9%. QuickBooks Online customers grew 36%, desktop subscribers 22%, and Enterprise Solutions customers 18%. Desktop license revenue fell 14% in Q3; management expected that migration to hosted and subscription products to continue.
- Consumer: Q3 revenue was $1.485 billion, up 13%; nine-month revenue was $1.749 billion, up 7%. Paid federal TurboTax units grew 10% year to date. Segment Q3 revenue included approximately $84 million shifted from Q2 due to processing delays and changes in product offerings.
- Professional Tax: Q3 revenue was $334 million, up 32%, while nine-month revenue was $394 million, up 3%. The Q3 increase included revenue recognized after delivery of software functionality that had been deferred in Q2.
- Q3 product revenue was $735 million versus $638 million; service and other revenue was $1.653 billion versus $1.453 billion. Nine-month product revenue was $1.251 billion versus $1.267 billion, while service and other revenue increased to $2.541 billion from $2.270 billion.
- Nine-month operating expenses rose $138 million, mainly from higher staffing ($104 million), advertising and marketing ($15 million), and share-based compensation ($13 million). Q3 operating expenses rose $60 million, including about $56 million of higher staffing costs.
Outlook, commentary, risks and unusual items
- Management expected significant operating cash generation in fiscal 2014 and believed cash, investments and operating cash flow would cover anticipated needs for at least the next 12 months. It expected to return excess cash through buybacks and dividends, subject to board discretion. No specific earnings or revenue guidance is stated in the provided filing text.
- Intuit cited pronounced seasonality: tax revenue is concentrated from November through April, and it typically incurs losses in the first and fourth fiscal quarters. Tax-form availability and agencies’ ability to accept e-filings can shift revenue between quarters.
- Intuit sold Intuit Financial Services in August 2013 for approximately $1.025 billion cash, recording a $36 million after-tax gain. It also sold Intuit Health, recording a $10 million net gain. These businesses are presented as discontinued operations. Nine-month total net income was $936 million versus $874 million; it included $46 million of discontinued-operations income in FY2014 and $5 million in FY2013. Q3 discontinued operations were nil in FY2014 versus a $36 million loss in FY2013.
- Other notable changes include approximately $190 million of additional lease obligations from facility lease extensions through 2025, and an expected approximately $250 million of income-tax payments in Q4 FY2014. The filing reported no significant off-balance-sheet arrangements.
- Key risks discussed include intense competition, including free tax and financial offerings; dependence on timely product releases and seasonal tax processing; service availability and data-center transitions; cybersecurity, privacy and fraud; reliance on third parties; regulatory and litigation exposure; and execution of product and cloud-service transitions. The Free File Alliance agreement was scheduled to expire in October 2014.
- The TurboTax refund-processing class actions were resolved as of March 21, 2014 under a settlement previously accrued and described as immaterial. Intuit said other routine legal matters were not expected to materially affect its financial statements, while noting litigation outcomes remain uncertain.
Important facts for investors to verify
- How much of Q3 Consumer and Professional Tax growth reflects revenue shifted from Q2, and how seasonal timing affects full-year comparisons.
- Whether QuickBooks Online and other subscription growth can offset declining desktop license sales and anticipated weakness in certain non-core payment offerings.
- Whether cash generation can sustain the stated repurchase and dividend plans after the $1.425 billion of year-to-date buybacks and expected Q4 tax payments.
- The continuing-operations comparison after the IFS and Intuit Health divestitures, including the impact of sale gains on reported total net income and cash.
- Developments affecting tax-market competition and regulation, including the Free File Alliance agreement’s scheduled October 2014 expiration, and Intuit’s service-security and data-center execution risks.